London - Britain fell deeper into recession than initially
thought in the first quarter of 2012 due to a slump in construction output,
raising the likelihood that the Bank of England will opt to inject more
stimulus to protect the economy from the eurozone debt crisis.
Britain is in its second recession since the 2007-2008
financial crisis, and the prospects for a recovery are cloudy as leaders in the
eurozone, Britain’s biggest trading partner, are still far from resolving their
debt woes.
The BoE’s Monetary Policy Committee (MPC) has indicated it
is ready to pump more money into the economy, having paused its quantitative
easing programme at £325bn this month, amid growing worries about a break-up of
the currency union.
"The economy is not recovering properly and with the
uncertainty over Europe hanging over the outlook as well, our suspicion is the
MPC will sanction further QE at some point later on this year," said Philip
Shaw, economist at Investec.
The Office for National Statistics said the economy shrank
by 0.3% in the first quarter of this year, more than an initial estimate of a
0.2% decline, and confounding analysts’ forecasts for an unchanged reading.
Year-on-year, the economy contracted by 0.1%, the first
annual decline since Q4 2009.
The figures will make uncomfortable reading for British
finance minister George Osborne, who has vowed to press ahead with harsh
austerity measures to curb Britain’s debts and has argued that the private
sector can fill the gap in public spending.
Britain’s economy has expanded by just 0.3% since the
Conservative/Liberal Democrat government came to power in 2010, and Thursday’s
figures showed government spending made the biggest contribution to the
economy.
Downward revision
The ONS said the downward revision to the Q1 data was the
result of a sharp drop in construction output, which fell by 4.8% on the
quarter, its steepest decline since the first quarter of 2009.
New data on expenditures suggested the decline in overall
GDP would have been steeper were it not for a 1.6% quarterly rise in government
spending, which was the biggest increase in four years and contributed 0.4
percentage points to GDP.
Household spending, meanwhile, rose by only 0.1%, its
smallest rise in six months, suggesting that a consumer-led recovery is not on
the cards.
The figures showed that exports also suffered. The trade
deficit increased to £4.4bn, with net trade shaving off 0.1 percentage point
from GDP.
But separate preliminary data showed business investment
posted its biggest quarterly rise in almost a year, and its largest annual
increase in almost seven years.
The International Monetary Fund this week warned about the
risks facing Britain and urged policymakers to boost growth by whatever means
necessary.
It suggested the BoE could cut rates further from their
record-low 0.5% and start buying private-sector assets.
And it recommended that the government should find money to
invest in infrastructure and do more to boost the flow of credit to companies.
The IMF said Britain may even need to consider a temporary tax cut to bolster
demand.
Although the BoE is concerned that official data might be
understating the strength of the economy, recent surveys have indicated that
activity is tailing off, while an extra public holiday in June is also likely
to depress growth in the second quarter.
In a further sign of weakness in the economy, figures
published by the British Bankers’ Association showed net mortgage lending rose
by £715m in April, around half the increase recorded a year ago, though the
number of mortgage approvals was up slightly on the year.